1. Consider the cash-flow pattern of the CDS shown in Exhibit 2 of the case. Can you set up a trading strategy using (long and short positions of) the default-free floating-rate bond and the IBM floating-rate bond that exactly replicates this cash-flow pattern? Given the coupon rate on the IBM floating-rate bond, can you determine what the CDS rate must be according to the law of one price?

Exhibit 2 DS Cash Flows from Perspective of Credit-Protection Buyer Ca Case 2: IBM does not default until T